Best practice in investment reporting

Best practices in investment reporting

Illmer

IIPC Investment Performance
Consulting AG

Update on best practices in
investment reporting

Date: October 2011
Produced by: Dr. Stefan J. Illmer

Illmer Produced by: Dr. Stefan J. Illmer
Consulting AG Success through excellence! Date: October 2011 - Slide 1


Basic idea behind the need for best practices

GIPS Standards

... but what about investment
reporting to existing clients?

Prospective clients gain
from improved transparency.

Investment reporting



Is there a common understanding? (1/3)

Investment reporting:
- content
- methodologies
- input data
- processes
Portfolio - etc. Client
Manager



Is there a common understanding? (2a/3)

Areas for discussion:
- returns (TWR versus MWR),
- relevant capital if overlay or
leverage,
- market value versus economical
exposure,
- fees and taxes (gross versus net),
- absolute versus relative return / risk,
- definition of risk,
- reporting periods,
- underlying prices,
- valuation of illiquid investments,
- underlying reference data,
- etc.

Portfolio Client
Manager



Is there a common understanding? (2b/3)

Return calculation Valuation and classification

- what prices?
- TWR or MWR?
- considering
- net or gross?
5.12% 25.71% leverage?
- after tax?
- how classified?
- ...
- ...

Benchmark and others

- what BM?
- appropriate
1.38% BM?
- after tax?
- ...



Is there a common understanding? (3/3)

Does the client have
the same expectations
as the portfolio
manager?
Is there enough
transparency on what is
reported?
Isn't there a potential
conflict of interest ?
... ?

Portfolio Client
Manager



Why is guidance on investment reporting important?

 To increase transparency.
 To improve investor education.
 To enhance investment industry credibility.
 To improve communication of expectations
and results.
 To better understand and mitigate risks. ... for sure on a global basis
 To understand and reduce conflicts of and for all client segments!
interests.
 ...

Establish best practices for investment
reporting to "existing" clients !



What happened so far? - Status August 2011 (1/3)

 2001: Discussion started within the European Investment Performance
Committee (EIPC => now EMEA Regional Investment Performance
Subcommittee) on transparency needs with respect to performance
attribution.
 2002: EIPC published "Guidance for Users of Attribution Analysis".
 2004: EIPC published "Guidance on Performance Attribution
Presentation".
 2005: Discussion started within the EIPC on transparency needs with
respect to investment reporting.
 2006: EMEA RIPS published the "Guidance for Recipients of
Investment Reporting" => List of questions to ask asset managers with
respect to client reporting.
 2006: Discussion started within GIPS Executive Committee and its
subcommittees on transparency needs with respect to client reporting
to "existing clients".




 2009: Discussion started within CFA Institute to form a working group
on guidance on investment reporting.
 2009: CFA Institute decided to begin work to develop best practice
guidelines for client reporting => GIPS Newsletter
 2010: GIPS Standards 2010 includes three provisions referring to
"existing clients":
– 0.A.8: Statements referring to the performance of a single, existing client
portfolio as being “calculated in accordance with the Global Investment
Performance Standards” are prohibited, except when a GIPS-compliant firm
reports the performance of an individual client’s portfolio to that client.
– 0.B.4: Firms should provide to each existing client, on an annual basis, a
compliant presentation of the composite in which the client’s portfolio is
included.




 2010: GIPS Standards 2010 approved by ... continued
– 8.A.4: When firms present composite performance to an existing wrap
fee/sma sponsor that includes only that sponsor’s wrap fee/sma portfolios
(resulting in a “sponsor-specific composite”):
a. Firms must disclose the name of the wrap fee/sma sponsor represented
by the sponsor-specific composite; and
b. If the sponsor-specific composite compliant presentation is intended for
the purpose of generating wrap fee/sma business and does not include
performance net of the entire wrap fee, the compliant presentation must
disclose that the named sponsor-specific compliant presentation is only for
the use of the named wrap fee/sma sponsor.
 2010: CFA Institute formed the Investment Reporting Working Group
(IRWG).
 December 2010: IRWG started work (working group members were
chosen and governing documents were created).
 Since December 2010: Monthly IRWG conference calls.



Relationship to GIPS Standards

Investment Reporting
Working Group
Best Practices

 Please note that the Investment Reporting Working Group Best
Practices is separate and distinct from the GIPS Standards.
 Please note that this discussion is a preliminary report on work that is
ongoing and evolving and therefore subject to changes (status as of
August 2011).



IRWG's objectives and stakeholders

 To establish investment industry best practices for reporting
investment results and information that promote interests of and instill
confidence in the users of investment reporting (=> principle based
best practices).
 To obtain worldwide acceptance of a single standard for the reporting
of investment results and information based on the principles of
transparency, fair representation, and full disclosure.
 To foster the notion of industry “self-regulation” on a global basis.

 The IWRG stakeholders are both the professional preparers and the
(intended) users of investment reporting, such as:
Asset management companies, custodians, administrators, prime
brokers, investment consultants, and investors.



IRWG - definition of investment reporting

 The IWRG defines investment reporting as the preparation and
presentation of investment information including the illustration of the
investments made, the results achieved, and the risks taken.
 The IRWG understands investment reporting as a subset of overall
client reporting within the investment management industry.
 The IWRG considers investment reporting to focus on current
exposures of the investments and to include reports on asset
allocation, performance, and risk, etc. Therefore, the IRWG does not
address reports designed for accounting, tax, and regulatory purposes.
 The IRWG considers investment reporting not only to include the
output, but also the inputs and the respective policies and procedures.



IRWG - goals of the best practices (1/2)

 To improve the quality of investment reporting to allow better feedback
into the investment decision-making process.
 To provide guidance on the minimum content of investment reporting.
 To provide guidance on methodologies for preparers and intended
users of investment reporting.
 To provide the basis for comparability of investment reporting.
 To provide guidance on the quality of the input data for investment
reporting.
 To support stronger internal processes for preparers of investment
reporting.
 To provide assurance to intended users of investment reporting that
preparers adhere to ethical best practices.
 To provide regulators the basis for potential future regulations in the
area of investment reporting.


IRWG - goals of the best practices (2/2)

 To facilitate education for preparers and recipients/users of investment
reporting.



IRWG - guiding principles of the best practices (1/2)

 The purpose for investment reporting and the reasons for its creation
and content are transparent and clear.
 The type of the intended user or the audience in mind, and their
expected use of the investment information, are taken into account
when designing the investment reports.
 The investment reporting is a fair representation of the investments
made, results achieved, and the risks taken.
 The investment reporting is relevant and appropriate for the presented
asset classes and investment strategies.
 The investment reporting complies with all applicable laws and
regulations.
 The policies and procedures for investment reporting are documented
and available upon request.



IRWG - guiding principles of the best practices (2/2)

 The policies and procedures for investment reporting are reviewed by
an independent third party.
 ...



Comments and questions



Contact details

Illmer Investment Performance Consulting AG
Weinbergstrasse 28
CH - 8200 Schaffhausen
Switzerland
www.iipc-ag.com

Dr. Stefan Joachim Illmer
Tel. +41 / 79 / 962 20 37
Email: stefan.illmer@iipc-ag.com



Disclaimer
This document was produced by Illmer Investment Performance Consulting AG (hereafter
"IIPC-AG") with the greatest of care and to the best of its knowledge and belief. However,
IIPC-AG provides no guarantee with regard to its content and completeness and does not
accept any liability for losses which might arise from making use of this information. This
document is provided for information purposes only and is for the exclusive use of the
recipient. It does not constitute an offer or a recommendation to buy or sell financial
instruments or banking services.
It is expressly not intended for persons who, due to their nationality or place of residence,
are not permitted access to such information under local law.


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